Thursday, 14 November 2019

International Situation Favours Upsurge of Indian Economy

Updated: February 10, 2019 11:02 am

India is projected as the excellent destination in emerging economies and is considered as the fastest growing economy in the world. How can we say this? The IMF has already projected India’s growth at 7.5% in 2019 and 7.7% in 2020. Thus the next 2 years are projected for India’s excellence. At the same time if we look at the global growth in 2018, remained close to post crisis level, there is fear that global expansion is weakening and at a faster rate than expected. One of the main reasons for this is China’s slowest growth in 28 years. China would have to be forced to go in for tax cuts and hence the stimulus to increase the consumption level and to avoid deterioration in 2019 performance. China’s GDP growth is reported at 6.6% in 2018 which has come down steadily since the 2010 high of 10.6%. The poor performance is also attributed to raising trade war with the US and at the same time signs of weakening domestic demand for goods and services. The trade dispute is not yet resolved and in the coming years the China’s negative narratives will have negative effect on global growth as China contributes 30% to the growth. The basic question arises how far this slow growth in China and its impact on global growth will affect the growth rate in India as Indian economy is also mixing regularly with global economy.

Advantage India

India has made advantage of the low oil price and increase in demand in the economy. On the basis of international developments, India can proceed with more confidence but at the same time trade disagreements must be resolved in policy determination. Raising harmful barriers further and destabilizing and already slowing global economy will definitely have impact on surging economies like India.

Growth in emerging and developing Asia is likely to go down from 6.5% in 2018 to 6.3% in 2019 and 6.4% in 2020, as calculated by IMF. Significantly, India has experienced an upward trajectory since 2018 as growth rate in 2018 was 7.3%. India would remain among the fastest growing major economies of the world as the domestic demand is increasing and the relationship between Monetary Authority and Indian Government is normalizing. Monetary tightening policy by the Central Bank will have to be normalized to increase the domestic demand and it goes in favour of Indian economy that the monetary authority and central government are working in their normal field.

International Situation and Opportunity for India

How India can take advantage of this international situation? India has brilliant opportunity to make advantage of the situation in next two years as it can explore new areas of cooperation with China considering the Chinese unresolved trade dispute with US. India has already started talking with China on duty cut as the major concern with India is trade deficit with China amounting to $6.3 billion in 2017-18. At the present time 16 countries are participating in talks in Jakarta, all the member countries of Regional Comprehensive Economic Partnership RCEP will chalk out time lines at concluding the agreement. The main issue before India is the gap in trade deficit and this has to be negotiated at bilateral level. India is under pressure to cut duties on at least 80% of imports on China. The time is right for India-China negotiations as China is under the pressure to improve its exports to India.

Road Map of 2019 and 2020

The road map of 2019 and 2020 for India appears rosy as the agro industry will show upsurge with the improvement in electric supply in rural area. The aggregate fiscal deficit of the states will be somewhat higher at about 3.2% in FY20 which is higher than the forecast of 2.8% in FY19. The announcement of farm loan waivers by some states like MP, Chattisgarh and Rajasthan extends the list of states that have resorted to this mechanism to address the problems of farmers. India rating agencies reported that the aggregate debt/GDP to rise to 25.1% in FY20. Ex RBI Governor Mr Raghuram Rajan has expressed his view about necessity of job creation. He is of the view that second generation of reforms is needed such as labour flexibility for job creation. He does not favour centralized structure and the monetary policy is to be formalized keeping in view the broader mandate of inflation. There is great need to make agricultural growth as the engine of further growth in 2020. There is also advantage of the slow growth of world economy as the oil prices may go down and if the prices remain low the fiscal deficit will be curtailed in India. It is quite important for India to keep the course of fiscal consolidation. There seems to be improvement in ease of doing business provided the reforms in GST keep in check the inflation target. The slowdown in China is consistent with the mature stage of the Chinese economy which is consistent with China rebalancing. The consolidation period in India requires cautious approach and job creation will remain a major challenge in the coming years.

Prospects of Economy

How far the present indicators raise hopes for growth of economy in 2020? The infrastructure rollout is likely to improve in 2020 with more avenues of investment. Banking reforms may create a favourable environment for investment and there may be end to credit squeeze in 2020 with more and more recapitalization of banking sector. Agriculture may improve as it is expected to grow as an engine of growth. The growth of agriculture and improvement in infrastructure are likely to create more jobs which is a basic necessity for India to become major power. On the basis of reforms and possibility of more investment it is expected that the economy is likely to grow in 2020.

By Manish Sharma

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